A firm has EBIT of $375,000, interest expense of $75,000, preferred dividends of $6,000 and a tax rate of 40 percent. The firm's degree of financial leverage at a base EBIT level of $375,000 is_________.
A) 1.09
B) 1.28
C) 0.97
D) 1.21

Question

Quizplus · Accepted Answer

Degree of financial leverage (DFL) = EBIT / (EBIT - interest)
DFL = $375,000 / ($375,000 - $75,000)
DFL = 1.28

A Firm Has EBIT of $375,000, Interest Expense of $75,000